Question

Security 00 Given the preceding data and the fact that Rm = 8 and om = 5, calculate the following: (a) The mean return for each security (b) The variance of each security's return (c) The covariance of returns between each security

Answer 1

Expected Return = alpha +(Beta * market Return)      
Variance= ((Beta * standard deviation of market)^2 + (Residual std Deviation^2 )      
Covariance = beta* market standard deviation^2      
      
A      
Expected Return =2.0+(1.5*8) =        14
Variance = ((1.5*5)^2) +(3)^2=      
65.25      
Covariance = 1.5*(5)^2 =       37.5
      
B      
Expected Return =3+(1.3*8) =       13.4
Variance = ((1.3*5)^2) +(1)^2=      
43.25      
Covariance = 1.3*(5)^2 =       32.5
      
C      
Expected Return =1+(0.8*8) =        7.4
Variance = ((0.8*5)^2) +(2)^2=      
20      
Covariance = 0.8*(5)^2 =       20
      
D      
Expected Return =4.0+(0.9*8) =        11.2
Variance = ((0.9*5)^2) +(4)^2=      
36.25      
Covariance = 0.9*(5)^2 =       22.5